Jeff Bezos to Warren Buffett, “Your investment thesis is so simple. You’re the second richest guy in the world and it’s so simple, why doesn’t everyone just copy you?” And Buffett answered, “Because nobody wants to get rich slow.”
You cannot build wealth overnight. You might be able to make a bucketload of money overnight, but you seldom find someone who has won the lottery retain the money they’ve won for more than a few years. Why is that so? Well, building wealth is a long term game. You need discipline and patience.
If you’re still reading, it means that you are ready to put in the effort. Good. Principles from The Richest Man In Babylon can get you started on this track.
Save 10% of what you earn
Here’s where the discipline part comes in. Every time you get paid, set aside 10% of it as savings. The other 90%, you can use to pay off your bills and buy things you need. “But I only get paid just enough”, I hear you say. You will never be paid enough.
Every Economics textbook will tell you, “Human wants are unlimited.” We will always want more and hence, no amount of money will ever be enough. The converse is true too – you can make do with what you get. Write down all your expenses from this month and the last two months. You will see that there are quite a few things that you could’ve cut down on – restaurant visits, drinking sessions, new shoes, new phone, etc. You’ll realise that you are spending more than you have to.
Create a budget
Now that you’ve written down your expenses for three months, tag the expenses as needs and wants. Needs are things that you absolutely cannot do without. Wants are things that fuel your desires.
You will notice that a few things are constant – the electricity bill, telephone bill, rent, etc. These are recurring expenses. These won’t be things you can cut off right-away so you’ll have to set aside money for this every month in your budget. If you notice wants in your recurring expenses, plan for a way to slowly transition out of them.
You should then have to look at your other expenses and see if they are absolutely necessary or if they are wants. Keep in mind that your total budget should not exceed 90% of what you make. I would suggest that you budget for 70% of what you earn and keep the rest as a buffer (for those impulse purchases).
If you have any debt, that should be factored into your budget too. Then, your budget should ideally look like 70% expenses, 20% for debt repayment, and 10% for wealth building.
Once you create a budget, stick to it as your life depends on it. Well, it actually does!
Invest the 10% you save
As mentioned earlier, you have to save 10% of your income the moment you get paid. But money in your savings account doesn’t build wealth. You will have to invest it to see it grow. If you are just starting out, I would recommend you start a recurring deposit to generate an emergency fund.
An emergency fund should have enough money to let you survive for at least 6 months if you don’t get paid, i.e; 90% of what you earn multiplied by 6. This will ensure that you have a comfortable cushion should something go wrong. Once you have accumulated enough, invest that money in a fixed deposit. You should reach into this stash of money only in case of emergencies and replenish it as soon as you can.
Now that you have built your emergency fund, you should look at options that will generate a better return on investment (pay higher interest). That’s a subject for another discussion. But in the current economic scenario, mutual funds are the way to go. Find a good mutual fund and start an SIP (Systematic Investment Plan) for the 10%. Finding a good mutual fund might be a little daunting when you start out, so you could use a service like Scripbox. I use Scripbox since they make good recommendations (at zero commissions/charge) and saves me the hassle of selecting a mutual fund on my own.
More than 10%?
Once you follow this advice from The Richest Man In Babylon, you will realise that it isn’t too hard to control your impulses. You should then challenge yourself to do better. Presently, I save 47%. It took me 5 years to get to 47%. All I did was keep my budget relatively the same while my salary increased. My next target? 50%!